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Will Mexico tow the US Fed’s line?

The Mexican Central Bank, Banco de Mexico, has already surprised markets with an interest rate hike this year. With a weakening peso and looming US Federal Reserve Policy meeting in June, followed by a Banco de Mexico policy meeting shortly afterwards, there is a possibility that Mexico could again raise interest rates.

May 20, 2016 // 5:01PM

In February this year, Banco de Mexico raised interest rates by 50bp to 3.75% and heavily intervened in markets by selling dollars to support the peso. With a selloff of the peso over the past two weeks, the Central Bank may again intervene.

Win Thin, writing in the Brown Brothers Harriman blog suggested that there is unlikely to be any imminent move or intervention in the market by Banco de Mexico to support the peso.

However Juan Pablo, a Trader at Grupo Bursatil Mexicano (GBM) said that the Central Bank would likely follow the US Fed with a rate rise, were one to occur in June.

“They will likely go for another 50bp increase,” he said.

The markets have already priced in Banco de Mexico following the US Fed. “Banco de Mexico amended their calendar so their policy meetings were a few days after those of the Fed, effectively acknowledging that it is deliberately following the actions of the US Reserve,” stated Juan Jose Hernandez Medina-Mora, an Analyst at GBM.

Although Banco de Mexico could again follow the US Fed in raising interest rates after policy meetings, Win Thin noted that the Central Bank has demonstrated its willingness to act in-between policy discussions, as evidenced by February’s move.

“Banco de Mexico may not wait for the US Fed to raise rates, and the Central Bank has openly stated that they could interfere in the markets by selling dollars,” Pablo stated.

Medina-Mora said that of all the tools available to Banco de Mexico to support the peso, raising interest rates is the most appealing.

Despite this, selling dollars is the most effective option available to the bank. Pablo said that if the depreciation of the peso continues, Banco de Mexico may sell US$1bn worth of dollars into the markets.

However, Banco de Mexico is very conscious about using its reserves, and will avoid selling dollars to prop up the peso if possible as the markets can easily absorb any sale, depleting reserves quickly, according to Medina-Mora.

Americas Currencies Policy & Government Mexico

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